Is This the End of the Employer Shared Responsibility Payment Under the Affordable Care Act?

If you are an applicable large employer (“ALE,” an employer with 50 or more employees), you are aware of the Employer Shared Responsibility Payment (“ESRP”) excise tax that the IRS can assess if health insurance coverage is not offered to at least 95% of the employees or the insurance is not affordable and provide minimum value. The coverage penalty is currently $2,900 per employee annually and the affordability penalty is $4,350 per employee annually. As the penalties are assessed on a monthly basis, they can quickly add up to substantial amounts. It’s not uncommon to see an ESRP assessment exceeding $100,000.  

Typically, these assessments arise from coding issues on the Form 1095-C or a missed checkbox on the Form 1094-C. ALEs have spent thousands of dollars individually to resolve these “clerical” errors in order to have the assessment reduced to zero. Even after resolving these clerical errors, some ALEs were left with a reduced assessment due to other IRS assessment methodologies. 

The IRS has been assessing the ESRP since 2017 even though their authority to do so has been questionable. Recently a Texas Federal District Court answered this question by stating that the IRS cannot assess the ESRP unless the Department of Health and Human Services (“HHS”) first sends the employer a Section 1411 certification.1 Most employers have not heard of a Section 1411 certification because HHS tried to delegate this responsibility to the IRS in a 2013 regulation. In fact, all IRS 226J letters state that they act as a Section 1411 certification. HHS has sent very few Section 1411 certifications to employers and they have appeared randomly in various states. 

Regardless of HHS’s inaction, the statute has always required a Section 1411 certification before any ESRP can be assessed. The law states, “at least one full-time employee of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan…” The court determined that HHS fumbled its responsibilities under the law by trying to delegate its departmental responsibilities to the IRS. The court stated that, “the required certification must come from HHS as directed by the statutory language.” Because the Court found that the IRS cannot issue a Section 1411 certification, they could not assess an ESRP. 

If an employer is currently responding to an ESRP assessment they may want to review the approach with their tax advisor before cleaning up any clerical issues. For those employers that paid an ESRP assessment in the previous three years, they may wish to consider filing for a refund.  Note that the employer in this case paid the penalty "under protest" and later sought a refund of the penalties.  Then, after receiving no response from the IRS, the employer sued the government, alleging that its process for assessing employer mandate penalties was improper.